Marketing the Offering 18:6 18:5.2 Requirements If the company uses an electronic road show in its IPO, it must either file the text with the SEC or make a bona fide version readily available without restriction electronically to any potential investor, together with an active hyperlink to a preliminary prospectus containing a price range. 8 The electronic road show is usually posted on a website hosted by a third-party vendor (such as RetailRoadshow.com) that provides this service. 9 A bona fide version of the electronic road show is one that covers the same general areas about the company, its management, and the securities being offered as any other version. The posted version need not be identical to the other versions, nor must the company provide an opportunity for questions and answers. Whether the company chooses to file the text of the electronic road show or make the presentation available electronically, the stipulated legend must be included. The company has the same potential liability for the contents of the electronic road show with either approach. Website posting is generally preferred because a video presentation is more effective than plain text and may be more conveniently accessible to some individual investors. An electronic road show can be posted as soon as a Form S-1 amendment containing the price range has been filed with the SEC, but is ordinarily not posted until live road show presentations commence. The electronic road show should be removed from the company s or host s website not later than the time that the Form S-1 is declared effective. 18:6 Rules of the Road Road shows have always been an indispensable part of an IPO. Until the past decade or so, however, road shows were largely unseen 8. Electronic road shows by public companies are not subject to the requirement that the text be filed or a bona fide version be made readily available. 9. An electronic road show posted on RetailRoadshow.com is freely accessible by anyone with Internet access. Access to an electronic road show posted on a similar website called NetRoadshow.com requires a password supplied by one of the offering s underwriters. If an electronic road show for an IPO is posted only on NetRoadshow.com, the company is required to file the text of the road show with the SEC. To avoid filing the text, most electronic road shows for IPOs are posted on RetailRoadshow.com whether or not they are also posted on NetRoadshow.com. The company could also avoid filing the text with the SEC by posting the electronic road show on its own website without restriction, but most IPO companies opt for posting on RetailRoadshow.com. Electronic road shows for follow-on offerings by existing public companies are generally posted only on NetRoadshow.com and are not freely available to the public. 18 21
18:6.1 INITIAL PUBLIC OFFERINGS by the public or the SEC and, in a sense, were unregulated. With the advent of electronic road shows and the heightened scrutiny of every aspect of IPOs, the legal significance of road shows now matches their longstanding investment importance. As a result, the company should observe the following basic guidelines in preparing for and conducting live and electronic road shows. 18:6.1 Legal Review In a bygone era it was commonplace for the road show materials not to be shared with counsel out of sight, out of mind seemed to be the rationale but legal review is now essential. Company counsel and underwriters counsel should review the presentation slides to be used in live road show presentations and review the electronic road show before posting. Counsel will probe to make sure the information presented is substantiated and consistent with the preliminary prospectus. Although road show presentations often put a slight marketing gloss on the information contained in the preliminary prospectus, counsel usually suggest that hyperbole be removed or scaled back. Counsel s input on the road show materials will be prompted both by liability concerns and the fact that the SEC staff examiners will have access to the electronic road show. 18:6.2 Availability of Documents Copies of the current version of the preliminary prospectus, including any free writing prospectuses, should be handed out to all live road show attendees. No other written materials such as copies of the presentation slides, sales literature used by the managing underwriters sales forces, company background sheets, recent press releases, or any other materials other than the current version of the preliminary prospectus should be provided, to avoid converting them into free writing prospectuses that must be filed and may generate liability. Any written materials (other than the preliminary prospectus and any free writing prospectuses) provided to live road show attendees must be returned at the conclusion of the presentation or will be subject to the free writing prospectus rules. Because of the risk that one or more attendees will not return such written materials before leaving the presentation, and the potential liability of the company and the underwriters for the contents of any such written materials, the better practice is not to distribute any written materials at live road show presentations other than the preliminary prospectus and any free writing prospectuses. The company should coordinate with the lead managers to ensure no other documents including internal sales materials are distributed at live road show meetings. 18 22
Marketing the Offering 18:6.5 18:6.3 Consistency with Preliminary Prospectus The road show slides and statements made during live and electronic road show presentations should be consistent with the preliminary prospectus and any free writing prospectuses and should not include other material information. The adage is that information presented in the road show should come from within the four corners of the preliminary prospectus (including any free writing prospectuses) or be derivable from information contained in the preliminary prospectus. Road show presentations sometimes include the company s operating targets, but rarely include financial projections. If the company plans to disclose additional material information in the road show, the company should consider whether the information should also be added to the preliminary prospectus in order to avoid a material omission. Road show presentations should not downplay the significance of the risk factors or other cautionary information, and all statements in the road show must be accurate and not misleading. 18:6.4 Q&A Sessions and Other Investor Follow-Up An essential component of a live road show presentation is the accompanying Q&A session. In responding to questions from prospective investors, company management should adhere to the same guidelines that govern the information contained in the road show slides and the scripted presentation. Although it is permissible to amplify on the information contained in the preliminary prospectus, management should avoid providing new, material information. On occasion, investors contact management with follow-up questions after attending a road show presentation. In effect, this is an extension of the Q&A session, and management may respond orally to investor inquiries within the same general guidelines (follow-up Q&A should not be conducted through email exchanges, however, because of the risk that the emails will be subject to the free writing prospectus rules). Some investors go further and conduct their own due diligence on the company and its business. Investors are entitled to do so, of course, but the company and underwriters should not facilitate the process (for example, by arranging for customer calls or providing written information beyond the statutory prospectus). 18:6.5 Attendance Research analysts employed by the underwriters are prohibited from attending live road show presentations. In addition, journalists should not be invited to attend live road show presentations. A subsequent article written by a journalist who was invited to attend 18 23
18:6.6 INITIAL PUBLIC OFFERINGS the presentation may constitute a media free writing prospectus 10 that is required to be filed with the SEC and may subject the company to liability. On the other hand, a published story based on a journalist s viewing of a publicly accessible electronic road show, with no involvement by the company or the underwriters, should not be treated as a media free writing prospectus. 18:6.6 Forward-Looking Statements If the company elects to make any forward-looking statements, these statements should represent the company s current best estimates and should identify key assumptions and risks upon which the estimates are based. The company should not make any forwardlooking statements that it would be unable or unwilling to commit to writing and include in the prospectus. The company cannot take advantage of the safe harbor for forward-looking statements provided by the PSLRA, 11 but similar cautionary language should be included in order to invoke the bespeaks caution doctrine. 18:6.7 Presentation Slides In preparing the road show presentation slides, companies should be mindful of the following general tips for effective presentations: Presentations should be succinct and focused usually no more than twenty-five to thirty slides, no more than five words in a slide s heading, and no more than five bullets per slide, with no more than two lines of text per bullet. Slides should contain key concepts rather than voluminous text and should be summaries rather than recreations of the prospectus as more words are added to each slide, the font becomes smaller and more difficult to read. Presentations are more effective if they incorporate graphs, charts, tables, and other visual depictions of data or words. Slides should communicate key points and function as an outline for the presentation management should not risk boring the audience by simply reading the slides. 18:6.8 Potential Liability Despite the informality of road show presentations (compared to the formality of the prospectus) and the spontaneity of accompanying Q&A 10. See section 11:2.3. 11. The PSLRA safe harbor is discussed in chapter 23. See section 23:2.3. 18 24
Marketing the Offering 18:7 sessions, most of the liability provisions that apply to the Form S-1 also apply to the contents of the road show. The company faces potential liability to investors pursuant to sections 12(a)(2) and 17(a) of the Securities Act and Rule 10b-5 under the Exchange Act for material misstatements or omissions in the presentation slides and oral statements in the road show. The company does not, however, have potential liability for the road show under section 11 of the Securities Act (which applies only to the Form S-1), and the contents of road show presentations are not subject to the company s indemnification obligations in the underwriting agreement (except to the extent the same information is contained in an electronic road show). 18:7 Impermissible Offering Communications A variety of communications both public and private are prohibited in conjunction with IPOs and other securities offerings. Issues regularly arise from company activities that may constitute impermissible offers of securities during the quiet period. The consequences of quiet-period violations vary, depending on the timing and nature of the infraction, but can include a delay in the offering, rescission risk disclosure in the prospectus, corrective disclosure in the prospectus, or the SEC s imposition of civil penalties. 12 Similar concerns can result from communications made by underwriter personnel, even when the communications are unauthorized. One recurring fact pattern involves an underwriter s employee contacting prospective investors in writing typically by email to discuss the proposed offering prior to the availability of a preliminary prospectus containing a price range. A communication of this nature may be an unlawful offer, potentially subjecting the underwriter and the company to liability. When events of this nature come to light, the company typically requires the underwriter involved to notify the email recipients that the emails were distributed in error, that the emails should be disregarded, and that the emails should not be further disseminated. Depending on the number and identity of the email recipients, the company may also refuse to permit the recipients to purchase shares in the IPO. In addition to taking corrective actions, the company typically includes prospectus disclosure describing the potential violation and acknowledging that the company may be required to repurchase the shares sold in the IPO at the original offering price for a period of one year following the date of the violation, while also stating its belief 12. The quiet period is discussed in more detail in chapter 11. 18 25